TMI Blog2010 (7) TMI 490X X X X Extracts X X X X X X X X Extracts X X X X ..... court per inter alia the cited decisions - Thus, though an erstwhile constituent thereof, and not mainland itself, it would nevertheless, where severed from the land and realized as such, stand to be categorized as a capital asset in specie - The gains on the sale of trees, decidedly a capital asset u/s, 2(14), would therefore stand to be assessed as 'capital gains' u/s. 45 of the Act Regarding cost of acquisition - Plants and trees arise out of the womb of the land without any organised effort or activity, which is what essentially the term 'spontaneous growth signifies - The assessee, however, in the computation of its income under the said head would be entitled to a reduction toward the decline in the value of the land on account of removal of such trees, and which would be independent and irrespective of whether the roots stood sold to the same purchaser, or stood not sold by the assessee, being unrealisable or otherwise; it being not the Revenue's case that the roots stood sold to somebody else - Decided in the favour of the assessee by way of remand - In the result, the assessee's appeal is partly allowed and partly allowed for statistical purposes - IT APPEAL N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , being sourced from his own land, reducing its book-value from Rs. 46.17 lakhs to Rs. 34.67 lakhs. The closing work-in-progress for the year stood valued at Rs. 215 lakhs, without disclosing the basis of such valuation. As the assessee had not incurred any cost in respect of soil and rubbles sourced from his land, which was explained by the assessee to have been booked and claimed on the basis of the prevalent market rate, he ought to have included the same as a receipt of his soil business, for which he had separately shown receipt of Rs. 6.5 lakhs - which, again, though, had not been offered for taxation, but credited to his capital account. In view of these defects, he applied the provision of section 145 of the Act, estimating the assessee's net profit/income from the contract business at 8% of the gross receipt (of Rs, 1,93,96,413), and that on hire charges at 10% of Rs. 7,42,090, i.e. , at a total of Rs. 16,25,922. In the first appeal, the assessee submitted that it had explained the lower profit for the year as on account of acceptance for a contract for widening Thiruvalla-Kumbazha Road at 16.79% below the CPWD rate(s) in terms of the probable amount of contract (PAC), re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed as site expenses. Similarly, why the conveyance expenses should not be supported by external (third party) evidence is not clear. The assessee has also not led any evidence or material in support of its claims, and refers in the main in his arguments only to the labour expenses. The primary onus to prove its return and to establish its claims is on the assessee, which we consider as not discharged. With regard to the claim of expenditure toward sale of soil and rubble at Rs. 11.50 lakhs, we do not find the same as relevant for the purpose of acceptance (or rejection) of books. If, and to the extent, the Revenue is of the view that the said expenditure is not an allowable expenditure, it could disallow the same. Likewise, if it is of the view that she said amount requires being brought to tax as income from other sources, it was at liberty to do so. The third objection is with regard to the valuation of WIP. The assessee has explained the same to be in respect of work done, and for which bills stand prepared, though not yet passed, and for which a prior approval of the sanctioning authority (in the concerned Department - PWD) is required. From the value so arrived, it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 12.69 lakhs, i.e. , by sustaining the profit on the hire charges, and applying the profit rate of 6.5% on the contract receipt, which was for the purpose to be reduced (by Rs. 10.05 lakhs) on account of components thereof not bearing any income element, as against the returned profit of Rs. 9.55 lakhs by the assessee. The assessee claims the estimate to be excessive, albeit without reference to any material When the quantum or estimate itself is in dispute, making claims, sons any basis, is of no moment; the law, in fect, only requiring the assessing authority to be not arbitrary and make the estimated an objective, reasonable manner; in short, fairly. In this regard, we are of the view that an informed estimate cannot be made in the absence of any definite information on the expenses in respect of labour expenses, site expenses and conveyance expenses, claim qua which is unsubstantiated, and which we have confirmed to be the only defect in the assessee's account for the year. There is no mention of the expenditure claimed on each of the three heads of account for the year under reference as well as for the earlier years, as also the normative figure(s) that obtains in the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r's report, as well as for the reason that as the purchasers only required timber for construction, there was no requirement for them to purchase the trees with roots. The decision by the apex court in the case of Vihnudatta Antharjanam would, thus, not apply in the facts of the case. In appeal, the ld. CIT(A) examined the matter. Noting the material relied upon by both the parties in support of their respective claims, it was found by her that the assessee, when confronted by the AO with the inspector's report, had not denied the said report in its entirety. He had, rather, sought to make a distinction between the primary and the secondary roots, stating that the secondary roots were left behind by the purchasers, as these are used only as firewood. The entire issue, therefore, in her view, hinged on whether the trees were sold with roots or without them. This is so as it is only when the roots are still left with the tree stumps, so that they stay rooted to the land, that the possibility of regeneration subsists, without affecting the capital structure, as held by the apex court in the case of Vihnudatta Antharjanam (supra). In view of the findings by the AO, supported by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the trees, as contended by the assessee, or to somebody else. However, the question or the issue here is not of the identity of the person(s) to whom the roots stood sold, which is what the controversy between the two opposing parties we observe as having boiled down to (the assessee contending to non-acceptance by the Revenue that the roots stood left behind by the purchasers themselves), and which, to our mind, is not the material, given the feet that the trees stand uprooted. The moot or the material question in this case would be the purpose for which the trees were cut and sold. For example, if the trees were cut by the assessee for planting fresh ones in their stead; the earlier ones having attained optimum size, while also commercially exploiting his asset, the same would stand to be assessed as income from other sources. Reference in this context is drawn to the decision in the case of CIT v. Ambat Echukutty Menon, 120 ITR 70 (SC), wherein, upholding the assessed claim of the receipt being capital, and not revenue, the hon'ble court clarified that the object for which the trees were cut is extremely relevant in deciding the issue. In that case the Revenue had nowher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocesses, of direct sale or user in own business, being economically equivalent, i.e., only a manner of realizing the value of the soil. Secondly, in our view, the argument is largely irrelevant. This is as the question whether the assessee's land is a capital asset u/s. 2(14)( iii ) of the Act is besides the point. The same would be relevant if what was being sold was land, i.e. , as where the standing trees stood sold along with the land, while what stands sold by the assessee is not land, but a disintegrated component thereof, and which for that reason cannot be considered as land itself. It may be that the assessee considers it economically more beneficial to exploit the land by realizing its components than the land as such. It is only where the same is sold as such, that the question of it being a capital asset or not, and thus the income arising on its transfer as being taxable or not, would arise. Reference in this context be also made to the decision by the apex court holding the ship-breaking activity to be a manufacturing activity; the same being not tantamount to sale of ship. The gains on the sale of trees, decidedly a capital asset u/s, 2(14), would therefore stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue, as the same (said value) stands to be now represented by a larger number of shares. The assessee must, therefore, to that extent, be considered as having incurred cost towards acquisition of right shares, which would stand to be reasonably allowed as a deduction in the computation of the capital gains on the sale of the right shares. We consider the same analogy as applicable in the instant case. Trees, together with land, stand acquired at a cost, and which, therefore, would only be toward capital structure/complex, i.e. , the land and the trees standing thereon. The said trees, and also those that arise on the land subsequent to its acquisition, nevertheless, continue to grow on their own. The same certainly has a bearing on the value of land, of which they are but an integral part. As such, where cut and sold, the assessee is only realizing the value of its capital asset, albeit by realizing separately its erstwhile constituents, such as trees. When sold in such a state, it cannot he said that what stands sold is land per se. The same, nevertheless, forming part of the assessee's capital structure or complex (composite asset), is a capital asset. Its separate cost, thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st possible manner under the circumstances. Reference in this context is made to the decision in the case of A.R.Krishnamoorthy v. CIT, 176 1TR 417 (SC), wherein the hon'ble apex court, rejecting the assessee's contention, made relying on the decision in the case of CIT v. B.C. Srinivas Shetty, 128 1TR 294 (SC), that determination of cost was impossible, clarified that though difficult the same must be engaged in, making the best possible valuation on the basis of evidence. We are also aware that the estimated cost of the trees sold would only be based on current valuations, while the cost, by definition, would have to be related to the time of acquisition. The law, by providing for adjustment of cost, on the basis of inflation index, itself since recognizes and addresses this infirmity, which had earlier inflicted the computation of capital gains under the Act, as it in effect led also to the taxation of the value realised on the transfer of the asset on account of the fall in the purchasing power of money. Adjusting the cost on the basis of the variation in the inflation index, i.e. , between the date of acquisition and transfer, thus, seeks to adjust the assessee's cost ..... X X X X Extracts X X X X X X X X Extracts X X X X
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